Author of this article: Chen Xi, Chief of Fixed Income at Kaiyuan Securities; Wang Shuaizhong, Contact Person Recently, market trading has been characterized by stagflation, with the market showing a &#34;double hit on stocks and bonds.&#34; According to traditional theory, during stagflation, one should hold more commodities and cash, while shorting stocks and bonds. However, upon reviewing historical stagflation periods, we find that in most cases, the situation was &#34;stocks rise + bonds fall.&#34;
The classic stagflation scenario in history, in the simplest terms, is stagflation = economic growth decline + inflation rise. The classic stagflation scenarios in history include:
(1) United States 1970-1980 This is the period most commonly compared in the current market. During this time, the S&amp;P 500 rose by about 50%, and the yield on 10-year U.S. Treasury bonds rose by about 5%. Some market views reviewing the stagflation in the U.S. at that time only emphasize the significant decline in U.S. stocks in 1973-1974, which is not an objective perspective. <img src="https://imageproxy.pbkrs.com/https://inews.gtimg.com/om_bt/OjIKcIHZQ3hOd_Qt5sc6j9yj4QsJrycBAU5IGdpzx1WpwAA/641?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://inews.gtimg.com/om_bt/OjIKcIHZQ3hOd_Qt5sc6j9yj4QsJrycBAU5IGdpzx1WpwAA/641"/> At that time, oil prices rose in three waves: The first wave, from 1970 to 1972, saw Brent crude oil prices increase by about 50%, and the S&amp;P 500 also rose by about 50%. This phase was also when the &#34;Nifty Fifty&#34; bubble in U.S. stocks was forming.
The second wave, from 1973 to 1974, saw Brent crude oil prices rise fivefold, leading to the collapse of the &#34;Nifty Fifty&#34; bubble and a significant decline in U.S. stocks. However, it is important to note that after oil prices fell in 1974, U.S. stocks continued to accelerate their decline until the end of 1974, indicating that oil prices were not the fundamental reason for the decline in U.S. stocks at that time.
The third wave, from 1978 to 1980, saw Brent crude oil prices double, while the S&amp;P 500 rose by about 50%.
In summary, from 1970 to 1980, there were three periods of rising oil prices, during which U.S. stocks rose significantly in two periods and fell in one period.
From the final results, during the stagflation period from 1970 to 1980, the S&amp;P 500 index cumulatively rose by about 50%, and the yield on 10-year U.S. Treasury bonds rose by about 5%.
(2) Japan After the pandemic, the environment in Japan is stagflation: on one hand, the trend of real GDP growth is slowly declining, while on the other hand, the year-on-year trend of CPI is significantly rising. Especially after 2022, inflation in Japan has been above 2% for four consecutive years. <img src="https://imageproxy.pbkrs.com/https://inews.gtimg.com/om_bt/OUO09UVbr7W4KHRQC5VJohTU7oiuNPoSV-uqzQV9_TYM4AA/641?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://inews.gtimg.com/om_bt/OUO09UVbr7W4KHRQC5VJohTU7oiuNPoSV-uqzQV9_TYM4AA/641"/> The performance of the Japanese market in a stagflation environment: from 2022 to now, the Nikkei 225 index has risen by about 90%, and the yield on 30-year Japanese government bonds has risen by about 2.5%.
Thus, in Japan during the stagflation period, it is also &#34;stocks rise + bonds fall.&#34; <img src="https://imageproxy.pbkrs.com/https://inews.gtimg.com/om_bt/O3YO8YPEaYHjjxbkfgpjADPY86GKqLUDpqM5dET_GX2Q0AA/641?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://inews.gtimg.com/om_bt/O3YO8YPEaYHjjxbkfgpjADPY86GKqLUDpqM5dET_GX2Q0AA/641"/>
(3) China 2016-2017 In the first half of 2016, there was discussion in the Chinese market about &#34;stagflation.&#34; As a result, the GDP growth rate in 2016-2017 was lower than that in 2014-2015, while the year-on-year PPI in 2016-2017 was higher than that in 2014-2015. <img src="https://imageproxy.pbkrs.com/https://inews.gtimg.com/om_bt/Okrh3-wTNMTyJkCWWyLGm_j_lftzOwlCG420n8aDzaPNkAA/641?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://inews.gtimg.com/om_bt/Okrh3-wTNMTyJkCWWyLGm_j_lftzOwlCG420n8aDzaPNkAA/641"/> So how did the Chinese market perform in 2016-2017? <img src="https://imageproxy.pbkrs.com/https://inews.gtimg.com/om_bt/OecHQGtzL9EAtgOW-lfhN0TSQneRAhDKpkpOsNTfVCHAUAA/641?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://inews.gtimg.com/om_bt/OecHQGtzL9EAtgOW-lfhN0TSQneRAhDKpkpOsNTfVCHAUAA/641"/> The performance of the Chinese market in 2016-2017 was that the CSI 300 Index increased by about 26%, and the 10-year government bond yield rose by about 1%. The result was still: &#34;stocks up + bonds down.&#34;
During the &#34;stagflation&#34; period, it is not necessarily &#34;double kill for stocks and bonds,&#34; but rather &#34;stocks up, bonds down.&#34;
From the above three cases, it can be seen that during stagflation, it is not necessarily &#34;double kill for stocks and bonds,&#34; but rather &#34;stocks up, bonds down.&#34;
The essential logic is: stock market fluctuations follow corporate profit fluctuations. In a stagflation environment, as long as the increase in prices is greater than the decrease in the economy, corporate profits will actually improve in a stagflation environment, which will lead to an increase in stock prices.
This is also the core logic of our understanding of the 2026 government work report: the GDP target for 2026 is lowered to reduce supply and increase prices, resulting in: GDP growth rate falling + prices rising.
Since the increase in prices is greater than the decrease in the economy, corporate profits will significantly improve, leading to an improvement in household income trends, and ultimately a rebound in nominal demand for consumption.
This process has already occurred in China in 2016-2017, as well as in Japan after 2022 and in the United States during 1970-1980.
The stock market follows the &#34;nominal economy that includes prices&#34; (upward during stagflation), rather than the &#34;real economy after excluding prices&#34; (downward during stagflation).
Therefore, in many stagflation periods, when the stock market valuation is reasonable at the starting point (the issue with the U.S. stock market in 1973 was unreasonable valuation), the stock market usually rises.
For the current Chinese stock market, we believe that the valuation of large-cap stocks is still at a low level, similar to the situation in early 2016. Therefore, we believe that under the conditions of economic growth slowing down and inflation rising, large-cap stocks will perform similarly to 2016-2017, showing a trend of upward movement.
During stagflation, bond yields generally rise.
Bond yields also follow the &#34;nominal economy that includes prices&#34; (upward during stagflation), rather than the &#34;real economy after excluding prices&#34; (downward during stagflation)
Therefore, during periods of stagflation, bond yields generally rise, unless the starting point of bond yields is too high, such as in the Chinese bond market at the beginning of 2021.
At the beginning of 2021, the valuation of the Chinese bond market was: the 10-year government bond yield reached OMO + 100bp, implying extremely optimistic expectations for the economy. Therefore, with the marginal economic decline and rising prices in 2021, bond yields were on a downward trend.
For the current bond market, the 10-year government bond yield is only OMO + 40bp. Although this is an improvement compared to OMO + 10bp in the first half of 2025, it still remains at the lower limit of the historical range of 40-70bp, far below the OMO + 100bp at the beginning of 2021.
The current valuation of the Chinese bond market is similar to the OMO + 40bp at the lowest point in 2016. Therefore, we believe that under the conditions of economic growth slowdown and inflation rebound, the trend of bond yields will be upward, similar to 2016-2017.
Risk Warning: Policy changes exceed expectations; Economic changes exceed expectations.
<img src="https://imageproxy.pbkrs.com/https://inews.gtimg.com/om_bt/OoxpOizDtaHf-Y2gv1YdXuJFp1-a5_D1-vz5Dm2cScO4IAA/641?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://inews.gtimg.com/om_bt/OoxpOizDtaHf-Y2gv1YdXuJFp1-a5_D1-vz5Dm2cScO4IAA/641"/>
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This article explores market performance during stagflation, pointing out that traditional theory suggests a "double whammy for stocks and bonds," but historical data shows that during stagflation, there is often a scenario of "stocks rising + bonds falling." Using examples from the United States from 1970 to 1980, post-pandemic Japan, and China from 2016 to 2017, it analyzes market performance in different stages, emphasizing that in a stagflation environment, the performance of the stock market and the bond market is not consistent

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[Open Source Fixed Income] Will "Stagflation" Definitely Lead to a "Double Kill" of Stocks and Bonds?